Mercury News reporter Matt Marshall looks at what happened to ten telecom and networking companies that each received more than $150 million of investment during the bubble years of 1999-2001. These companies include such household names as Zhone Technologies, Yipes Enterprise Services, and Calient Networks. Now, Marshall writes, these three companies are the living dead — they have enough capital to survive (and indeed, enough that the investors are not going to let them go gracefully out of business), but they lack viable long-term business models.
Marshall’s piece reveals a fact that’s often overlooked by critics of the “dot bomb.” That is, telecom and networking startups blew through far more money that dot com startups ever did — probably by an order of magnitude. For every Webvan and Pets.com, there are a dozen like Colo.com (bankrupt, May 2001) and Centerpoint Technologies (bankrupt, Dec. 2002). When I asked executive outplacement firm Challenger, Gray & Christmas about this earlier this year, they told me that ten times as many people lost jobs in the telecom sector as had been laid off in the Internet/dot com sector. In other words, the years 2001-2002 were the telebomb, not dot-bomb.
In light of that, VC investment in telecoms is way down: $834 million in the Bay Area in the first half of this year, compared with $4.31 billion during the same period in 2000.
Still, telecom and networking startups are one of the biggest sectors of VC investment — together with software, another sector often disparaged as defunct and passe. Take a look at the Merc’s detailed rundown showing which Silicon Valley companies got VC investment during Q2 2003, and you’ll see that these two sectors far outnumber consumer, hardware, semiconductor, and services investments. (The Merc’s Jack Davis and Glenda Queensbury, together with PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, do this analysis of VC investments every quarter. It represents a lot of digging, reporting, analysis, and hard work, and the results are an invaluable snapshot of what kind of innovation is getting funded in Silicon Valley.)
What’s going on here is that telecom and software are humbled, but still significant areas for investment and innovation. Infrastructure still matters. Software still matters, particularly as people develop new environments and infrastructures for it to run in. And, telebomb or no, the past few years have been all about a massive buildup of infrastructure, from Web-enabled services to broadband network cabling to wireless data carriers. Now the challenge is to figure out how to make that infrastructure useful.